A new research report released today outlines problems with the growing trend among cities to borrow against future growth and divert tax revenues as a way to attract economic development.

“Localities too often use tax-increment financing as an all-purpose subsidy for developers rather than its original purpose as targeted tool to revitalize neighborhoods with circumstances that otherwise discourage investment,” said Phineas Baxandall, Ph.D., Senior Analyst for Tax & Budget Policy at the U.S. Public Interest Research Group.

Forty nine states have legalized tax-increment financing deals or “TIFs,” with Arizona having eliminated its TIF law in 2006, according to the report. These deals divert future growth in the tax base from a prescribed area toward special development projects over many years, sometimes hurting school departments and other public structures that must then be financed from a narrower tax base.

["We applaud USPIRG for drawing attention to the fact that TIF has strayed from its original purpose of helping neighborhoods that need reinvestment most and in many cases is actually harming them instead," said Greg LeRoy, Executive Director at Good Jobs First, which has conducted their own research on TIFs.

"TIF can be a great tool, but only if it is used in ways that support existing communities," said Geoff Anderson, President and CEO of Smart Growth America. "USPIRG's recommendations for TIF reform are a key part of the smart growth strategies regions across the country are already using to build stronger local economies."

Used only as part of advancing part of a specific development strategy in limited areas.

As temporary as possible, with unspent funds promptly returned to the general budget if left unspent after a certain number of years.

Capped by the state as a percent of a municipality’s land that can be placed under TIF agreements.

Conducted through a fully open and democratic process, with information about TIF projects placed online like other best practices for spending transparency.

Accompanied by clear, measure benchmarks for the responsibility of developers.

“It’s not hard to understand why municipal official like a sudden infusion of cash and developers want subsidies, but localities need to ensure that these tools are closely targeted with long-term needs in mind,” said Baxandall.